This report aims at analysing the gearing ratios of both easyJet PLC, a British airline operating in several countries, and Lufthansa AG, a German aviation company operating globally. easyJet is listed in the British stock index FTSE100 and Lufthansa is listed in the German stock index DAX. These companies have been chosen, because they belong to the continent’s biggest airlines and a direct comparison seems to be feasible. The gearing ratios have been calculated using data from the companies’ annual reports from 2015 onwards.
The report found that easyJet has always had a lower gearing ratio than Lufthansa and consequently a more stable, less risky financial position. Moreover, the report found that the accounting policies of both companies are the same and thus the interpretation of results is not distorted. However, the report also found that the tone of easyJet’s narrative reporting is more optimistic, which is likely to influence the reader’s opinion in its favour. Limitations are the small sample size, the short time span and that only one ratio is analysed. Consequently, results cannot be generalised. Moreover, financial ratios do not provide a benchmark. That’s why an analysis of the industry average had been conducted as well.
Table of Contents
1. EXECUTIVE SUMMARY
2. INTRODUCTION
3. RELATED THEORY
4. DATA ANALYSIS AND DISCUSSION
5. CONCLUSION
Research Objectives and Key Topics
This report aims to conduct a comparative analysis of the financial performance of easyJet PLC and Lufthansa AG by evaluating their respective gearing ratios. The primary research objective is to determine which airline maintains a more stable financial position by assessing how these companies finance their long-term funds through debt versus equity, while also considering the impact of accounting policies and narrative reporting on financial interpretations within the competitive aviation industry.
- Comparative financial ratio analysis of easyJet PLC and Lufthansa AG.
- Evaluation of gearing ratios as indicators of financial risk and creditworthiness.
- Assessment of the impact of narrative reporting tones on investor perception.
- Benchmarking against industry averages to provide a broader context.
- Analysis of the influence of accounting policies and historical cost conventions.
Excerpt from the Book
3. Related theory
Both companies have faced challenges regarding “higher oil prices and increased compensation payouts for delays and cancellations caused by air controller shortages and strikes” (Spero, 2018). The gearing ratio analysis can provide information on how these increased expenses were financed, with equity or debt.
Financial gearing provides information about the source of long-term funds (Kumar & Rao, 2015) and consequently about the financial situation of a company (Elliott, 2019). It overlaps with operational gearing and income gearing (Figure 1), because a high amount of debt increases the company’s interest expenses and the proportion of annual pre-interest profits devoted to lenders (Araujo & Hambur, 2018).
Financial gearing could be considered the most relevant ratio for stakeholders, because it indicates the creditworthiness and financial risk associated with a company (Mishra, 2019). It is calculated as the proportion of a firm’s total long-term capital that is provided by creditors (see Appendix A).
A company that is heavily geared is more likely to fall into financial distress (Männasoo, Maripuu & Hazak, 2018), which would affect several stakeholders, such as employees, shareholders and suppliers. A high gearing ratio has been found to increase agency costs and consequently the risk of losing control over the company (Yazdanfar & Öhmann, 2015). However, the interest payable to lenders is tax-deductible and increases the return on equity (Faisal, Khan & Al-Aboud, 2017). Research even found that debt can boost the firm’s financial performance (Morley, 2016; Husnu & Ibnu, 2019). Although gearing ratios are regarded as an objective method (Robinson, Henry, Pirie, Broihahn & Cope, 2015) and results can be compared in an international context (Gencia & Mates, 2017), companies can use different accounting policies (see Appendix B) to improve their gearing ratio (Elliott, 2019).
Summary of Chapters
1. EXECUTIVE SUMMARY: This chapter provides an overview of the report, noting that easyJet maintains a lower, more stable gearing ratio than Lufthansa, and acknowledges the influence of narrative reporting on shareholder perception.
2. INTRODUCTION: This chapter outlines the scope of the study, defining the goal of evaluating easyJet and Lufthansa's financial performance through gearing ratios and industry benchmarking.
3. RELATED THEORY: This chapter establishes the theoretical framework, explaining the significance of gearing ratios in assessing financial risk, debt management, and the potential impact of corporate accounting and narrative disclosures.
4. DATA ANALYSIS AND DISCUSSION: This chapter presents the empirical findings of the study, visualizing the gearing trends of both airlines and discussing the implications of their debt levels relative to competitors and the market.
5. CONCLUSION: This chapter summarizes the findings, concluding that easyJet’s lower gearing ratio offers a more stable position, while noting limitations in scope and providing recommendations for future research.
Keywords
Gearing ratio, Financial performance, easyJet, Lufthansa, Debt financing, Equity, Aviation industry, Financial risk, Narrative reporting, Accounting policies, FTSE100, DAX, Market reaction, Stakeholders, Industry average.
Frequently Asked Questions
What is the fundamental focus of this report?
The report focuses on analyzing the financial stability of easyJet and Lufthansa by examining their gearing ratios to assess how they manage their long-term financing.
What are the primary thematic fields covered?
The core themes include financial statement analysis, corporate financing strategies, risk management in the aviation sector, and the role of narrative reporting in shaping investor opinion.
What is the core research question?
The report seeks to identify which company, between easyJet and Lufthansa, exhibits a more stable financial position when analyzed through their gearing ratios and industry benchmarks.
What scientific methods are utilized?
The study employs a quantitative ratio analysis of annual report data, supplemented by an investigation into industry averages and an qualitative analysis of narrative reporting tone.
What topics are addressed in the main body of the work?
The main body covers the theoretical basis of gearing ratios, the specific financial data and trends for both airlines from 2015 onwards, and a comparative discussion regarding their competitive position.
Which keywords best characterize this research?
The work is best defined by terms such as gearing ratio, financial performance, debt-to-equity, aviation, and narrative reporting.
How does the tone of narrative reporting influence the analysis?
The analysis suggests that easyJet's more optimistic narrative reporting likely influences reader perception more favorably than the more neutral reporting style observed at Lufthansa.
Why is industry benchmarking important for these airlines?
Due to the high volatility of the airline industry, benchmarking against the FTSE100 and DAX averages is essential to accurately gauge the relative financial standing of each firm in an international context.
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- Vivien Barth (Autor), 2020, Gearing ratios, Múnich, GRIN Verlag, https://www.grin.com/document/514583
